I believe as a financial coach and financial writer I should eat my own pudding.
Following my article What is Dollar Cost Averaging: Drip Your Way to Millions, I decided to follow my own advice and devise a dollor cost averaging (DCA) experiment.
Remember the reason we dollar cost average is to spread out our investments since we don’t know what the market will do in the future.
*If you’re in the UK it’s called pound cost averaging. Fun fact eh?
The DCA Experiment Plan
I decided to invest $500 in a S&P 500 Index Fund for 5 consecutive weeks. I could have staggered it out for 5 months (1x per month), but I don’t like my money sitting on the sidelines for too long.
I invested $100 per week starting in February.
The Dollar Cost Averaging Experiment Results
The below is a summary of the 5 transactions.
- The average purchase share price was $139.36
- The market did very well during this time period (near market highs).
- If I had invested all $500 on 2.7.13 at a share price of $137.95, I would have been able to purchase 3.624 shares vs the 3.587 shares actually purchased–a difference of .037 shares.
Final Thoughts on my Dollar Cost Average Experiment
So in the end, my Dollar cost averaging experiment showed that a lump sum would have fared better in the end than DCA.
We don’t know the future and what the market will do from day to day.
My experiment could have easily gone in favor of Dollar cost averaging (Pound cost averaging), should the Sequester tanked the market, a bad jobs report, or Apple released another Apple Maps like debacle.
Does that prove that DCA is a bad idea? Will I abandon DCA in the future?
NO WAY! I will continue to engage in dollar cost averaging to smooth out my investments in the market. I’ll take a loss of .037 shares from time to time to hedge against the highs and lows of the stock market.
What are your thoughts about my Dollar cost averaging experiment? Do you have any conclusions I missed?